MGEB02H3 Chapter 5: Chapter 5
29 Oct 2011
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Chapter 5 uncertainty and consumer behaviour 11-10-28 9:21 pm. 5. 1 describing risk: list all possible outcomes of a particular action or events as well as the likelihood that each outcome will occur. Different people may attach different probabilities to different outcomes and thereby make different choices: used to calculate expected value and variability of the possible outcomes. Expected value: expected value probability-weighted average of the payoffs associated with all possible outcomes, measures central tendency the payoff or value that we would expect on average. Payoff value associated with a possible outcome: e(x) = pr1x1 + pr2x2 + + prnxn. Decision making: people"s attitude toward risk affect many of the decisions they make. Risk aversion and income: the extent of an individual"s risk aversion depends on the nature of the risk and on the person"s income, risk-adverse people prefer a smaller variability of outcomes.
